Unit 2Unit 2Supply and

Demand

4.1 What is Demand?

• Describe the concept of demand.

Explain how demand and utility are related.

Complete: pg 89

Characteristics of Demand

Characteristics ofDEMAND

Desire AbilityWillingness to buy

goods.

What is Demand?

• MICROECONOMICS!!!

• The area of economics that deals w/ behavior and decision making by individuals and firms.

• Demand

• is the desire, ability, and willingness to buy a product.

• Individual demand curve

• illustrates now the quantity that a person will demand varies depending on the price of a good or service.

Figure 4.1The Demand for Compact DiscsFigure 4.1The Demand for Compact Discs

Figure 4.1The Demand for Compact DiscsFigure 4.1The Demand for Compact Discs

The Law of Demand

The Law of Demand states that the quantity demanded of a good or service varies inversely with its price. – When price goes up, the quantity demanded

goes down; when price goes down, the quantity demanded goes up.

Demand and Marginal Utility

• UTILITY= USEFULNESS or SATISFACTION!

• Marginal utility

• is the extra usefulness or satisfaction a person receives from getting or using one more unit of a product.

• The principle of diminishing marginal utility

• states that the satisfaction we gain from buying a product lessens as we buy more of the same product.

4/29

Review for

QUIZQUIZ

Quiz 1) _____ is the desire, ability, and

willingness to buy a product. 2) __________ states that the quantity

demanded of a good or service varies inversely with its price.

3) ____ is the usefulness or satisfaction one gets from a product.

4) _____ _____ is the extra usefulness! 5) ______ _____ ____ is when

satisfaction decreases.

Project: Due 11/27

In your groups: Write up a list of at least 15 questions to ask store managers about the effect that sales prices have on consumer demand.

1 person conduct an interview using your questions.

Make sure you ID the store and manager interviewed!!

Changes in Demand

Explain what causes a change in quantity demanded.

Describe the factors that could cause a change in demand.

What would happen?

A disease destroys much of the coffee crop in South America.– How might this affect the price of coffee? – The demand for substitute products? – The demand for complementary products?

4.2 Change in Quantity Demanded

The change in quantity demanded shows a change in the amount of the product purchased when there is a change in price.

Income effect – means that as prices drop, consumers are left

with extra real income.

Change in Demand

A change in demand – is when people buy different amounts of the

product at the same prices. – can be caused by a change in income, tastes, a

price change in a related product (either because it is a substitute or complement), consumer expectations, and the number of buyers.

Consumer Tastes

Why do tastes change? The more popular a product is the more we

WANT!!– EX> Touch screen phones, iPods, fuel

efficient cars

However, if we get tired of it, we buy less.

Substitutes

• Substitution effect • means that price can cause consumers to

substitute one product with another similar but cheaper item.

Prices for substitutes go up and down together.

NAME some substitute products!

Complements

Goods that are related….. You one in order to have the other.

NAME some products that complement each other!

Change in Consumer Expectations

If a new product comes out, we buy less of the original product.

EXAMPLES:

Assignment

Complete Q’s 3,4,5 on pg 93– Q’s 1-2 on page 94– Q’s 3,4,5 on page 99

4.3 Demand Elasticity

– Understand the factors that determine demand elasticity.

Change in Price

Effect Effect Effect

Change in Price

Effect:Greater change in

demand

Effect:Lesser change in

demand

Effect:Proportional change in

demand

Demand Elasticity

Elasticity measures how sensitive consumers are to price changes.

Demand is elastic when a change in price causes a large change in demand.

Demand is inelastic when a change in price causes a small change in demand.

Demand is unit elastic when a change in price causes a proportional change in demand.

The Total Expenditures Test

• Price X quantity demanded = total expenditures.

• If the change in price and expenditures move in opposite directions on the curve, the demand is elastic, if they move in the same direction, the demand is inelastic; if there is no change in expenditures, demand is unit elastic.

Determinants of Demand Elasticity

• Demand is elastic if the answer to the following questions are “yes”.

– Can the purchase be delayed? Some purchases cannot be delayed, regardless of price changes.

– Are adequate substitutes available? Price changes can cause consumers to substitute on product for a similar product.

– Does the purchase use a large portion of income? Demand elasticity can increase when a product commands a large portion of a consumer’s income.

Scenario

You own a restaurant that is fully booked on the weekends. In midweek, however, you rarely have enough bookings to stay open. To make more money during this slow period, you decide to cut dinner prices by 1/3. From $15 to $10 on Wednesdays and Thursdays.– Do you think this will increase your revenue?

Explain in detail!

Figure 4.6Estimating the Elasticity of DemandFigure 4.6Estimating the Elasticity of Demand

4/30

Complete all questions on page 110– TEST FINISHERS SEE ME!

ECO JEWELERY

String= $.50 Regular Round Beads = $1.00 Elongated Beads= $2.00 Shaped Beads = $3.00 Cube Beads = $3.00 Gold Beads = $4.00

5.1 Law of Supply

• Specify the reasons for a change in supply.

Demand/Supply

Difference 1 Difference 2 Difference 3

What is Supply?

The amount of a product that would be offered for sale at all possible prices.

THE LAW: Suppliers will normally offer more for sale at higher prices and less at lower prices!– Doing what is best for the seller!!– MONEY!!!!

Change in Quantity Supplied

• A change in quantity supplied is the change in amount offered for sale in response to a change in price.

• A change in supply is when suppliers offer different amounts of products for sale at all possible prices in the market.

– the cost of inputs; productivity levels; technology; taxes or the level of subsidies; expectations; and government regulations

Changes

Cost of imputs can cause a change in Supply

Productivity: How much can be produced? Technology: New machines can increase

productivity. Gov’t: pays subsidies to increase or

decrease production.

Elasticity of Supply

Supply is elastic when a small increase in price leads to a larger increase in output—and supply.

Supply is inelastic when a small increase in price cause little change in supply.

Supply is unit elastic when in price causes a proportional change in supply.

Q: What is the difference between demand elasticity and supply elasticity?

A: Both measure the way quantity (whether bought or produced) adjusts to a change in price.

Quiz over 4.2,4.3, and 5.1

1) Name 3 things that can change the quantity of supply.

2) What is the definition of supply? 3) The _____ effect means that as prices drop,

consumers are left with extra real income. • 4) The ______ effect means that price can cause

consumers to substitute one product with another similar but cheaper item.

• BONUS: What is the title of Robert Downey Jr.’s new movie?

6.0 Price

• Price• the monetary value of a product as established by

supply and demand–is a signal that helps us make our economic decisions.

• provide incentives to buyers and sellers.

• High prices are signals for producers to produce more and for buyers to buy less. Low prices are signals for producers to produce less and for buyers to buy more.

Characteristics

Prices are the result of competition between buyer and seller

Prices are flexible Prices are straight forward Prices are a system: Link all markets!

– EX> Gas goes up= SUV sales go down!

Price Adjust

• Price adjustments help a competitive market reach market equilibrium, with fairly equal supply and demand. • Buyers want?

• Sellers want?Figure 6.1aFigure 6.1a

Market Equlibrium

Prices are stable and quantity supplied and demanded are equal

Hmmm

At the end of spring, the manager of a clothing store notices that the stockroom is stacked with sweaters that are $80. He decides to mark the sweaters 45% off.

– HOW much are the sweaters now?

Figure 6.1bFigure 6.1b

Figure 6.2aFigure 6.2a

Equilibrium

Surplus: Q supplied is greater than Q demanded

Figure 6.2bFigure 6.2b

Figure 6.2cFigure 6.2c

Shortage: Q supplied is less than Q demanded.

Figure 6.2dFigure 6.2d

Equilibrium Price: Price that clears the market w/ no shortages and no surpluses

• A change in price is normally the result of a change in supply, a change in demand, or both. Figure 6.3aFigure 6.3a

The Competitive Price Theory

The Theory of Competitive Pricing represents a set of ideal conditions and

outcomes; it is the MODEL Competition keeps costs low

Chapter 6 quiz

1) _____ acts a signal for the buyer and seller.

2) _______ is when the government decides everyone’s “fair share.”

3) _____ _____ is when there neither a shortage or surplus.

4) ____ is when Q>D.5) ____ is when D>Q.

READ pages 150-154

Await further instructions…

ID People or firms who benefit or suffer because of these policies. Pick a group leader to discuss effects of each.

Up or Down

Price ceiling vs. Price FloorPrice ceiling vs. Price Floor PC= Maximum price that can be chargedPC= Maximum price that can be charged

• RentRent PF=Lowest price that be paid for a good or PF=Lowest price that be paid for a good or

service.service.• Minimum WageMinimum Wage

Target Price= a price floor for farm productsTarget Price= a price floor for farm products Talking Market:Talking Market:

– Markets “talk” when prices move up or down Markets “talk” when prices move up or down dramatically.dramatically.

7.1 Competition Structures

• Explain the characteristics of perfect competition.

• Identify several types of monopolies.

• Assignment: Read pg 177 and answer Q’s Assignment: Read pg 177 and answer Q’s 1-21-2

Perfect Competition When a large number of buyers and sellers exchange

identical products under five conditions.

Large number of buyers and sellers.

Buyers and sellers should act independently.

The products should be identical.

Buyers and sellers should be well-informed.

Buyers and sellers should be free to enter, conduct, or get out of business.

Imperfect Competition: Monopolies, Oligopolies

Monopolistic Competition

• Meets all conditions of perfect competition except for NO identical products. • A PC is to a PC is another PC

• Athletic shoes

• Use of advertising, giveaways, or other promotional campaigns to differentiate their products from similar products in the market. (NON-PRICE)• How to make them more appealing!

Oligopoly

Market structure in which a few very large sellers dominate the industry. – EX> Auto Industry

Free Trade Price Wars• 2 forms of collusion include:

• price-fixing

• dividing up the market for guaranteed sales.

Monopoly

A market structure with only one seller of a particular product.

Natural monopoly– Electric Power Co

Geographic monopoly– Cable/Phone

Technological monopoly– Microsoft/Apple

Government monopoly

7.2 Market Structure

List the problems caused by inadequate competition.

Inadequate Competition Mergers and acquisitions can lead to several

consequences: Inefficient resource allocation

– CEO Bonuses

Reduced output• Resource immobility occurs when land, capital,

labor, and entrepreneurs stay within a market• Empty buildings and plans

• Externalities are unintended side effects that either benefit or harm a third party.

• Public goods are products everyone consumes.

Assignment

Pg 171 Q’s 3-6 Pg 176 Q’s 3-6 Pg 183 Q’s 3-6

Chapter 7 Review:

Pg 186: Reviewing Key Terms & Reviewing Facts

BONUS PROJECT

Which soda has the monopoly in the area?Which soda has the monopoly in the area? Research the availability of Coke and

Pepsi in local restaurants, movie theaters, and public vending machines in the Orangeburg area. – Type up your findings. Include name, location,

and brand of sodas found.